Risks that can affect Nidec's operating results, stock price, and financial condition include the following.
1. Management strategy risks
(1) Risks related to political and economic downturns (Especially significant risk)
Our products and the end-products are produced and consumed in Asia, the United States, Europe and Japan, mainly in China, and demand for our products may be adversely affected by unexpected economic, political and policy trends in these countries or regions. In particular, our products are often used in end-products that are subject to discretionary spending, such as personal computers, consumer electronic goods and automobiles, and thus a decline in general consumption levels could adversely affect our sales. Similarly, capital investment levels in the manufacturing sector can be particularly sensitive to economic trends, and a decline in capital investment could adversely affect sales of our products that are used in industrial applications. Our business, results of operations and financial position may be materially and adversely affected by negative economic trends in future periods. In fiscal 2020, amid continuing concerns about the impact of trade friction between the United States and China, the spread of COVID-19 has led to lockdown of cities and restrictions on movement, reductions in production activities and consumer spending, and instability in the supply chain, all of which have adversely affected the global economy and adversely affected NIDEC’s financial position and operating results. In particular, the suspension of factory operations by automakers and a decline in capital investment led to a decline in demand for some NIDEC products in this segment. In addition, with the establishment of a new government in the United States, the United States returned to the Paris Agreement and shifted to a proactive stance on climate change, and it is expected that the global movement toward decarbonization will accelerate in the future. Furthermore, with the European Commission's consideration of the introduction of the border carbon tax, it has become clear that Japan, particularly the United States, will follow suit. If it is determined that the products and their production activities offered by NIDEC do not have the expected environmental value, additional taxation could increase the product selling price and reduce price competitiveness. Also, in light of the above-mentioned legal changes, customers may impose decarbonization on our products and production activities. As a countermeasure, we are considering the large-scale introduction of renewable energy at our plants.
(2) Risks related to changes in the technological environment and industrial structure (Especially significant risk)
If changes in demand due to technological changes and changes in customer trends in response occur at a faster pace than NIDEC expects, NIDEC’s operating environment in this market may be adversely affected. For example, the HDD motor business is one of NIDEC’s main businesses and has been a revenue base for NIDEC for a long time. However, the structural changes in the storage market due to the establishment of SSD and cloud computing have led to changes in the business model of customers, leading to a decline in demand for NIDEC’s HDD motors. Under these circumstances, orders from some HDD manufacturers, our main customers, decreased significantly in fiscal 2020. In the future, we will focus on HDD motors for servers, which will be driven by the expansion of the cloud market, and secure a certain amount of profit. At the same time, we will accelerate our business portfolio transformation by concentrating resources allocated for the development and production of HDD motors for terminals on new products such as mobility solutions.
(3) Risks related to competition (Especially significant risk)
We generally face aggressive competition in the markets in which we conduct business. Particularly in the markets for automotive and appliance components, we often face fierce competition with domestic manufacturers in emerging economies. To maintain our competitiveness in the markets, we believe that we should maintain, or may need to increase, our substantial level of investment in research and development, expand our production, sales and marketing capabilities, enhance services and support, timely develop new products, and further improve our existing products. We will also need to continue our cost reduction efforts in order to maintain our profitability. Our competitiveness may decline and/or our profitability may be adversely affected if: • any of our markets develops faster than our expectations due to rapidly increasing demand or otherwise, causing our market share to decline relative to our competitors that are able to better meet increasing demand or otherwise cope with developing markets; • our cost reduction efforts are insufficient to offset declines in market price levels or increases in raw material costs; • our competitors’ competitive efforts result in technological innovations, improved manufacturing efficiencies or enhanced research and developmental capabilities, rendering our products and technologies obsolete; • mergers or consolidations among our competitors result in a relative decline in our competitive position; or • we are unable to obtain financial, technological, human or other resources necessary to maintain or enhance our investments. Currently, NIDEC's main market for EV traction motor systems is China. China is promoting vehicle electrification as a national policy, and currently has the largest EV market in the world. NIDEC currently positions traction motor, which is equivalent to EV engine, as an important strategic product. Therefore, a loss of competitiveness in the market due to the rise of cost-competitive and fast-developing local manufacturers could have a significant impact on NIDEC's overall growth strategy. As a countermeasure, we are strengthening partnerships with Chinese companies with significant influence in this market. Regarding traction motor system for EVs, we have formed an alliance with Guangzhou Automobile Group Co., Ltd., a leading automobile manufacturer in the country in 2019. In addition, by increasing production capacity in China, we are developing a supply system that assumes a rapid increase in demand. Plants are already in operation in Pinghu, and production is planned for Dalian and Guangzhou in the future. Also, we established the Suzhou Development Center in Suzhou in 2019 to create a system to respond quickly to customer requests by localizing development.
(4) Risks related to prior investments for anticipated customer demands (Especially significant risk)
If NIDEC anticipates growth in demand, we may expand our manufacturing capabilities in advance of anticipated customer demand. Therefore, if demand falls short of production capacity, an increase in amortization burden due to operating loss or a devaluation of inventories due to overstock may put pressure on profit. For example, a production plant for EV traction motor systems for which demand is expected to expand rapidly in the market is already operating in Pinghu City, China. Production of a single motor for EVs is scheduled to begin in Poland soon. In addition, production plants in Dalian and Guangzhou will be constructed in the future. We are also planning to build a production plant for EV inverters in Serbia, Europe. We will strengthen our supply system in Europe, where demand for EVs is expected to increase due to decarbonization. However, should we fail to secure the initially anticipated order volume, due to changes in the progress of product development and market entry of competitors as well as in the demand for end-products, NIDEC's operation results and financial position may be significantly affected. Furthermore, if the equipment introduced to our plants becomes obsolete or their applications need to be altered due to rapid technological innovation, we may need to reduce their currently estimated service lives, increasing the depreciation burden per consolidated accounting period. On the other hand, if we underestimate our customers’ needs and fail to make the necessary capital investments, we may lose market share due to our inability to meet customers’ demands. In addition, in anticipation of lead times to obtain inventory and materials from our suppliers, we may also from time to time order materials in advance of anticipated customer demand. This advance investment and ordering may result in excess inventory levels, resulting in unanticipated inventory write-downs if expected orders fail to materialize.
(5) Risks related to M&A (Especially significant risk)
We have achieved much of our growth by acquiring and otherwise investing in other companies that have provided us with complementary technologies, product lines, marketing and sales networks, and customer base. The continued success of our acquisition and investment activities constitutes a key factor in achieving our current business strategy. Acquiring technology and commercial distribution centered on the automotive business is becoming increasingly important. In the automotive business, particularly traction motor system for EVs is expected to become a pillar of future growth. As the expansion of the EV market is expected to accelerate rapidly amid the trend toward green recovery, NIDEC’s competitiveness may decline if it fails to acquire the technology, commercial distribution and facilities necessary for manufacturing traction motor systems for EVs at an appropriate time to keep pace with market growth. As we aim to achieve sales of 10 trillion yen in fiscal 2030, we expect NIDEC’s business model to shift from selling individual motors to modules and systems. As the market undergoes rapid changes, it may become impossible to keep up with the pace of market growth if we fail to properly select and acquire the technologies necessary to transform our business model. To the extent that we are unable to make successful acquisitions or investments, we may not be able to continue to expand our product range, marketing or sales networks or customer base, and our growth rates could be adversely affected. Critical to the success of our acquisitions is the ordered and efficient integration of acquired businesses into our organization. Our acquisitions may not generate the operational and financial returns we expect. The success of our future acquisitions will depend upon factors such as: • accuracy of various due diligence analyses; • our preliminary survey’s ability to detect those liabilities of the acquiree that could negatively affect NIDEC; • our ability to manufacture and sell the products of the businesses acquired and to integrate the technologies of the acquired businesses with our own to develop new products; • our ability to integrate the acquired businesses’ operations, products and personnel; • our ability to retain key personnel of the acquired businesses; and • our ability to extend our financial and management controls as well as our reporting and compliance systems and procedures to acquired businesses. Our new and additional investments in other companies are subject to other uncertainties that may have a material adverse impact on our business. For example, the fair value of our investments in other companies may be impaired if their business results deteriorate. Changes in economic policies of local governments, laws and regulations, and accounting rules applicable to companies in which we invest may also have a significant adverse effect on our financial results. Failure to succeed in acquisitions or investments, or an inability to find suitable acquisition or investment targets, could have a material adverse effect on our business, results of operations and financial position. And NIDEC recorded a large amount of goodwill and intangible assets acquired in connection with acquisition, and as of March 31, 2021, goodwill and intangible assets were recorded at 320 billion yen and 195.6 billion yen respectively. NIDEC believes that these assets appropriately reflect the future profitability achieved through the efficient integration of the acquired businesses, though we may not be able to generate the estimated amount of profits due to a deterioration of the business environment and others. In that case, NIDEC will need to recognize an impairment of these assets, which could adversely affect its operating results and financial position.
(6) Risks related to compliance with various laws and regulations
We conduct our business subject to ongoing regulation and associated regulatory compliance risks, including the effects of changes in laws, regulations, policies, voluntary codes of practice, accounting standards and interpretations and application errors in Japan and other countries in which we conduct our business. As we expand the range of our products and the geographical scope of our business, we will be exposed to risks that are unique to particular industries, markets or jurisdictions. Our compliance risk management systems and programs may not be fully effective in preventing all violations of laws, regulations and rules. Our business activities are subject to a wide range of environmental laws and regulations in Japan, Asia, North America, Europe and other areas. These laws and regulations include those relating to discharge of chemicals into the air and water, management, treatment and disposal of hazardous substances and wastes, product recycling, prevention of global warming and the obligation to investigate and remediate soil and groundwater contamination. The European Commission agreed to legislate a target of 0 greenhouse gas emissions by 2050. In addition, we agreed on a new target for 2030 to reduce emissions by at least 55% from the levels in 1990. Moreover, the European Union, the United States, and Japan are considering the introduction of a border carbon tax, which imposes tariffs according to the amount of CO2 emissions from imported products. This is another example of the rapid acceleration of global efforts toward decarbonization. Many of our operations require environmental permits, the terms of which may impose limits on our manufacturing activities and require the incurrence of costs to achieve compliance and which may be subject to modification, renewal and revocation by the issuing authorities. Moreover, if these laws, regulations and permits become more stringent in the future, the amount of capital expenditures and other expenses which may be required to complete remedial actions and to continue to comply with applicable environmental laws, regulations and permits could increase and be significant, which would materially and adversely affect our business, results of operations and financial position. Our business activities are also subject to various other governmental regulations, both local and international, including antitrust, anti-bribery, anti-terrorism, intellectual property, consumer protection, taxation, export regulations, tariffs, foreign trade and exchange controls. Moreover, as we expand our operations into new products and geographical markets, we may be required to further enhance our compliance policies and procedures. Because we are listed on the Tokyo Stock Exchange, we are required to comply with the appropriateness of financial reporting under the application of the Financial Instruments and Exchange Act of Japan and other laws and regulations. We are continuing to expand our business as our business grows, and we need to strengthen our compliance system regarding the appropriateness of financial reporting. Our failure or inability to comply fully with applicable laws, regulations, standards and rules could lead to fines, public reprimands, damage to reputation, enforced suspension of operations or, in extreme cases, withdrawal of authorization to operate, adversely affecting our business. In addition, future changes in laws, regulations, rules, policies, voluntary codes of practice, accounting standards, fiscal or other policies and their effects are difficult to predict, and additional financial, administrative and human resources may be required to put in place new compliance systems.
2. Business operation risks
(1) Risks related to recruiting and retaining highly skilled personnel (Especially significant risk)
Our business depends on the continued employment of our senior management, engineers and other technical personnel, many of whom would be extremely difficult to replace. A wave of technological innovation is arriving and we are on the brink of whether or not we can ride on the wave. NIDEC will need to develop a system to additionally hire, train, integrate and utilize human resources with a high level of knowledge of new markets, such as AI and IoT, and significant numbers of highly skilled human resources. The competition is intense worldwide for recruiting such personnel, and if NIDEC may be unable to attract such additional personnel, NIDEC could lose the opportunity to ride on the wave of technological innovation. In order to achieve sales of 10 trillion yen in fiscal 2030, NIDEC is promoting three reforms of its personnel system: the evaluation system, grading system, and compensation system. To thoroughly implement the merit-based and performance-based system, we will strive to employ highly specialized human resources, secure executive human resources, and strengthen the development process by conducting flexible evaluations and remuneration based on results, smooth personnel changes based on the right person for the right job, and human resource development.
(2) Risks related to our research and development
We engage in continuous research and development activities, including those related to basic technologies, new products, product improvements, manufacturing processes and low cost products. The markets in which NIDEC provides its products are continually undergoing rapid technological innovation, focusing resources on five areas: decarbonization, energy-saving, laborsaving, 5G and thermal solutions, and digital data explosion. In particular, demand for traction motors for EVs is expected to increase further in the future against the background of decarbonization. However, as environmental regulations are being strengthened mainly in Europe and the United States, it is expected that customer demand for products with environmental performance (high efficiency and resource conservation) and delivery dates, which are triggered by legal regulations, will continue to increase. In such markets, our success will depend upon our ability to continue to develop superior technologies, products and processes in a timely manner in order to meet our customers’ needs effectively. If third parties succeed in developing new technologies, products or processes that are more attractive to our customers than ours due to our inability to accurately anticipate the direction of the market, our inability to conduct research and development in an effective or timely manner or otherwise, our products could be rendered obsolete, their sales share shrinks, and they will impede the expansion of new product businesses and markets. Anticipating such shifts accurately and developing appropriate technologies, products and processes in a timely manner present a significant challenge. Determining the direction of our research activities related to basic technologies is particularly difficult, and the risk of our being unable to recoup the costs related to such activities can be significant. If we are unsuccessful in our research and development activities, our business, results of operations and financial position could be materially and adversely affected.
(3) Risks related to quality of our products
The perception of quality has changed dramatically in recent years. Product quality must be defined in terms of human rights and the working environment in the procurement process of materials used in products, as well as CO2 emissions during excavation. We manufacture state-of-the-art motors and other electronic products and, as a result, are exposed to potential warranty and product liability claims arising from alleged or actual defects in our products in the normal course of business. In particular, widespread malfunction of any end-product in which our products are incorporated may lead to consumer dissatisfaction, recalls and lawsuits. In the automotive, appliance, commercial and industrial motors and other parts markets, where we seek to expand our business, strict safety standards are imposed by societal demand, and if we were unable to provide safe and high quality products, such an event could result in an accident involving serious property damage and/or loss of life, a product may become subject to a mandatory recall and so forth. If such malfunction is caused by or attributed or alleged to be attributed to defects in our products, our brand image could be damaged, we may be subject to adverse regulatory action and significant legal claims or drawn into disputes with our customers, and our results of operations may be adversely affected by lost sales or costs associated with recalls. In addition, significant financial and human resources may be incurred, and management’s attention may be diverted, if we are required to defend ourselves against legal claims. We generally maintain insurance against product liability claims, but our insurance coverage may not be adequate for any potential liability ultimately incurred. In addition, insurance could become unavailable in the future on terms acceptable to us. A successful claim that exceeds our available insurance coverage or a significant product recall could have a material adverse impact on our business, results of operations and financial position.
(4) Risks related to procurement of raw materials or components
We rely on third party suppliers for raw materials, components and unit assemblies used in our manufacturing processes. Our production capacity will be limited if one or more of these materials or components become unavailable or available only in reduced quantities or at increased prices. Furthermore, a country’s governmental policy changes relating to specific raw materials or conditions of use of components and changes in customers' procurement conditions, etc. may place constraints on NIDEC’s capacity to procure raw materials or components. As human rights and the labor environment, and the availability of resources in the parts procurement process become more diverse and more stringent, if our ability to procure raw materials or components is constrained by these factors, we would invest in product design and development to enable us to reduce our usage of the raw material or component in question and/or secure suppliers of alternative materials. However, in the event of prolonged quantitative shortages of, or qualitative deficiencies in, materials or components, we may experience production delays that could adversely affect our business, operating results and financial position. As a countermeasure, training is provided to departments in charge of purchasing to strengthen communication with suppliers. In addition, NIDEC’s production volume may be restricted since the procurement environment for raw materials, such as resins and electronic components, may deteriorate for supply-demand relations becoming unbalanced due to COVID-19 pandemic and trade issues between the United States and China. As a countermeasure, we are securing multi-source products through the examination of substitute products medium- and long-term requirements, and securing supply capacity.
(5) Risks related to our operations in overseas countries
A substantial portion of NIDEC’s manufacturing and marketing activity is conducted in the United States, Europe and in other region, such as China. Due to our overwhelmingly high ratio of overseas production, there are a number of risks in doing business in such overseas markets, including the following: • economic slowdown or downturn in the relevant industries in foreign markets; • international currency fluctuations; • labor shortages, labor dispute and labor cost increases, especially in China and Southeast Asia; • political instability; • changes in trade restrictions and tariffs; • difficulties associated with staffing and managing international operations; • generally longer receivables collection periods; • potentially adverse taxes; • cultural and trade differences, and • significant time and capital required for expanding overseas businesses before achieving a return on capital.
(6) Risks related to intellectual property
Our business is dependent on our ability to protect the proprietary rights to our technologies and products and other intellectual property, which we seek to protect through patent, trademark, copyright and other legal protection afforded to intellectual property rights as well as contractual provisions and our internal information control system. Despite these efforts, we face the following risks: • we could incur substantial costs in defending against claims of infringement of the intellectual property of others, and such claims could result in damage awards against us, orders to pay for the use of previously unrecognized third-party intellectual property or injunctions preventing us from continuing aspects of our business, which could in turn have a material adverse effect on our business, results of operations and financial position; • our protective measures may not be adequate to protect our proprietary rights; • other parties, including competitors with substantially greater resources, may independently develop or otherwise acquire equivalent or superior technology, and we may be required to pay royalties to license the intellectual property of those parties; • patents may not be issued pursuant to our current or future patent applications, and patents issued pursuant to such applications, or any patents we own or have licenses to use, may be invalidated, circumvented or challenged; • the rights granted under any such patents may not provide competitive advantages to us or adequately safeguard and maintain our technology; • we could incur substantial costs in seeking enforcement of our patents against infringement or the unauthorized use of our trade secrets, proprietary know-how or other intellectual property by others; and • the laws of foreign countries in which our products are manufactured and sold may not protect our products and intellectual property rights to the same extent as the laws of Japan, and such laws may not be enforced in an effective manner.
(7) Risks related to leaks of confidential information
In the normal course of business, we possess personal and other confidential information on our customers, other companies and other third parties with whom we do business as well as personal information of our employees. Although we have security measures, access control in research and development sites and strict management of CAD data, etc. in place to protect such information, we may be subject to liability or regulatory action if any of such information is leaked due to human or technical error, unauthorized access, other illegal conduct or otherwise. Failure to protect confidential information could also lead to a loss of our competitive advantage and customer and market confidence in us, adversely affecting our business, results of operations and financial position. Moreover, societal trust in our sales activities, systems and brand image will be lowered. As these countermeasures, NIDEC has established the Information Security Management Office in 2019. In line with this, NIDEC has established an Information Security Committee and the information security manager and the information security promoter in each organization to build a cross-group security management system. In fiscal 2020, the Information Security Management Office took the lead in conducting e-learning on information security for employees, and established the Information Security Enhancement Month to disseminate information for the purpose of raising awareness of information security.
(8) Risks related to our pension plans
Some companies of the NIDEC Group adopt both a defined benefit pension plan and a defined contribution pension plan for their employees who fulfill certain requirements. We may incur losses if the fair value of our pension plans’ assets declines, if the rate of return on our pension assets declines, or if there is a change in the actuarial assumptions on which the calculations of the projected benefit obligations are based. We may also experience unrecognized service costs in the future due to amendments to existing pension plans. Moreover, fluctuation in interest rates, changes to the environment surrounding NIDEC and other factors may adversely affect the amount of unfunded pension obligations, among other factors. In addition, the assumptions used in the computation of future pension expenses may not remain constant.
(9) Risks related to fluctuations of foreign currency exchange rates
A significant portion of our overseas sales is denominated in currencies other than the Japanese yen, primarily the U.S. dollar, Euro, the Chinese yuan and Thai baht. As a result, the appreciation of the Japanese yen against the U.S. dollar, Euro and other currencies will generally have a negative effect on our sales, operating profit and profit. In order to mitigate against this risk, in recent years we have been attempting to offset a portion of our foreign currency revenue by matching the currency of revenue with the currency of expense. For example, if revenue for a particular product is in U.S. dollars, we attempt to purchase the supplies and resources used to produce that product in U.S. dollars. Nevertheless, we remain exposed to the effects of foreign exchange fluctuations. We may also experience significant effects from foreign currency exchange rate fluctuations when the results of operations of subsidiaries operating in currencies other than the yen are consolidated into our financial statements, which are reported in Japanese yen.
(10) Risks related to fluctuations of interest rates
We have long-term receivables and interest-bearing liabilities with fixed and variable interest rates, and we may enter into interest rate swaps and other contracts in order to prevent risks related to the fluctuation of such interest rates and to increases or decreases in cash flows. To the extent that their effects are not hedged, we are exposed to interest rate fluctuation risks which may affect our interest expenses, interest income and the value of our financial assets and liabilities.
(11) Risks related to our liquidity of funds
We rely on borrowings from financial institutions and direct equity financing from financial markets to finance our operations, capital expenditures and acquisitions of other companies. NIDEC aims to achieve sales of 10 trillion yen in fiscal 2030. As the scale of fund procurement is expected to expand in the future, NIDEC is diversifying its sources of funding. To this end, it is necessary to further enhance our ability to raise funds by maintaining and improving our ratings. At the same time, it is important to comply with the corporate value judgment criteria that take into account ESG, which has been firmly established in recent years. If, due to changes in financial market conditions or other factors, financial institutions reduce the amounts of their lending, credit lines, or terms of lending to us, and if we are unable to find alternative financing sources on equally or more favorable terms, our business may be materially adversely affected. In addition, if there is a significant downgrade of our credit ratings by one or more credit rating agencies as a result of any deterioration of our financial position or if investor demand significantly decreases due to economic downturns or otherwise, we may not be able to access funds when we need them on acceptable terms, our access to capital markets may become more restricted, or the cost of financing our operations through indebtedness may significantly increase. This could adversely affect our business, results of operations and financial position.
(12) Risks related to recoverability of deferred tax assets
We must assess the likelihood that our deferred tax assets will be recovered from future taxable profit and to the extent we believe that recovery is not likely, we are required to reduce our deferred tax assets. In the event of a deterioration in market conditions or results of operations in which we determine that there is additional uncertainty regarding realization of all or part of our net deferred tax assets, the resulting adjustment to our deferred tax assets would decrease our profit during the period in which such determination is made.
(1) Risks related to our dependence on our Representative Director and Chairman, Shigenobu Nagamori
The continued success of NIDEC has depended mainly on the abilities and skills of Mr. Shigenobu Nagamori, the founder of NIDEC. However, in January 2020, Mr. Jun Seki, who is well versed in the growing automotive business, joined NIDEC and from April 2020, Mr. Nagamori and Mr. Seki moved to a management leadership structure together and focused on fostering a successor. Starting from June 22, 2021, Mr. Nagamori will be exclusively appointed as Chairman and Representative Director and Mr. Seki, who will be appointed as Chief Executive Officer, will shift to a structure in which he is ultimately responsible for the execution of management and the results. As the founder and Chairman and Representative Director, Mr. Nagamori will fully support Mr. Seki. Also, as the Chairman and Representative Director he will continue to participate in important management decision-making for the sustainable growth of the Company, and will firmly achieve sales of 10 trillion yen in 2030. However, if there is any sudden departure of Mr. Nagamori, it may have a negative impact on NIDEC’s business, operating results and financial position.
(2) Risks related to internal controls over financial reporting
As a public company, we are subject to the requirements regarding internal controls over financial reporting under the Financial Instruments and Exchange Act of Japan, and it is essential for us to have effective internal controls, corporate compliance functions and accounting systems to manage our assets and operations. Designing and implementing an internal control system requires significant management, human and other resources. Once we identify any significant deficiencies or material weaknesses in our internal control systems, we may require additional resources and incur additional costs to remediate such deficiencies or weaknesses. We are continuously reviewing to strengthen the global internal control system. However, if management determines that our internal control over financial reporting is not effective for any period or deviates from internal control, we may be unable to timely file financial reports or such internal control may interrupt stakeholders and management’s effective decision making, and as a result, our market perception could be negatively affected. Depending on the severity of, and causes and other factors relating to, a material weakness in internal control over financial reporting, we could be subject to liabilities or sanctions of applicable laws and regulations. In addition, we could be restricted in our ability to access financial markets for capital raising. In fiscal 2020, NIDEC shifted to a company with an Audit and Supervisory Committee in order to further strengthen internal controls and expand sustainable corporate value. In addition to strengthening the supervisory function of the Board of Directors, we are working to further enhance internal control by speeding up decision-making through increased management efficiency and enhancing discussions at the Board of Directors. Moreover, NIDEC has established The Remuneration Committee as a voluntary advisory body to the Board of Directors, and ensures fairness, transparency, and objectivity by obtaining appropriate involvement and advice from independent outside directors with regard to executive compensation.
4. Risks related to contingencies
(1) Risks related to natural and human disasters
Natural disasters, fires, public health issues, armed hostilities, terrorism and other incidents, whether in Japan or any other country in which we or our suppliers operate, could bring about political or economic instability and cause damage to us, our suppliers or customers. For example, a large-scale natural disaster that causes massive damage to infrastructure and power outages, or a contagious disease pandemic could adversely affect our operations by rendering our employees unable to work, reducing orders from customers or disrupting our suppliers’ operations. If any such disaster occurs in any region in which any of our major customers or production or development bases are concentrated, such as Thailand or China, or in Japan where our headquarters and key research and development facilities are located, the adverse effect on our results of operations and financial condition could be particularly pronounced. Our network and information systems are important for normal operations, but such systems are vulnerable to shutdowns caused by unforeseen events such as power outages or natural disasters or terrorism, hardware or software defects, or computer viruses and computer hacking. Any such events, over which we have little or no control, could significantly hinder our production activities and our sales activities, delay the delivery of products, and make it difficult for us to obtain materials and components from suppliers, and also require large expenditures to repair or replace our facilities. We maintain various types of third-party insurances against damage to property and other risks. The types and amounts of insurance that we obtain are determined based on the usefulness of the insurance, its cost, and the scope of compensation from selfinsurance. Our insurance policies are subject to deductibles, policy limits and exclusions that result in our retention of a level of risk on a self-insured basis. While we believe our insurance coverage is comparable to the coverage maintained by similar companies in our industry, losses not covered by insurance could be significant, adversely affecting our business, results of operations and financial position. The global epidemic of the new coronavirus (COVID-19), which occurred in the latter half of the fiscal year ended March 31, 2020, is affecting NIDEC's businesses and supply chain functions. As a measure to ensure business continuity, NIDEC established the Risk Management Measures Division in mid-January 2020 to ensure the safety of employees and minimize the impact on the business. Overseas plants located in areas where there was a spread of COVID-19 infection experienced a temporary decline in operating rates, but at the time of disclosure of this report, they have recovered. However, any new negative impact of the COVID-19, such as the spread of the new variants of the COVID-19, could have a negative impact on NIDEC’s business, operating results and financial position.
(2) Climate Change Risks
Since COP21 adopted the Paris Agreement in December 2015, the issue of climate change has come to be positioned as a global priority for businesses in all countries and regions. For NIDEC, which develops businesses around the world centering on product development and production activities, climate change is not only an opportunity for business creation but also a source of wideranging medium- to long-term business risks. Defining the risk of incurring an indirect loss caused by changes in policies and regulations related to climate change, technology development, market trends, and the marketplace reputation and others is defined as “transition risk”, and the risk of incurring a direct loss due to disasters caused by climate change as “physical risk,” the realization of the following risk events could have adverse effects on NIDEC's financial position. Transition risk a) The increase of tax burden due to delays in responding to carbon tax and other energy transformation measures aimed at realizing a decarbonized society; b) The loss of market opportunity and increased compliance costs due to stricter regulations applied to existing products and services, and non-compliance with new standards; c) The increased difficulty of acquiring raw materials for electronic components (rare minerals, steels, and other non-ferrous metals such as high-end aluminum and copper) as well as their rising procurement costs, due to global “electrification” trends; d) The delay in research and development of alternative raw materials required by new low-carbon products and increase of associated costs; e) The decrease of corporate value due to ineffective climate change actions, and the resultant decline of investment attractiveness and downward adjustment of credit rating. NIDEC is implementing the following measures to address “transition risk”. ◇SMART 2030 project was started in April 2019 with the goal of reducing the total amount of CO2 emitted through NIDEC's business operation process by 30% (base year: fiscal year ended March 31, 2018 results) by fiscal year ending March 31, 2031; ◇Promotion of research and development activities based on the SDGs concept; ◇Establishment of multiple purchasing routes. Physical risk a) Suspension of business activities due to frequent flood damage caused by typhoons and heavy rains; - Inundation and other forms of disruption in power and gas supply networks; - Damage to the employees' lives due to house collapses, road disruptions and others; - Stagnation of product transportation due to a suspension of transportation service. b) Restriction on business activities due to drought; - Lack of factory water due to tighter water intake restrictions by governmental authorities; - Lower productivity due to rising water prices (cleaning, cooling, domestic water in corporate dormitories and others). c) Health hazard due to rising temperature; - Increase in the number of heat strokes; - Acceleration of the spread of infection. d) Supply chain disruptions caused by the above factors. NIDEC is implementing the following measures to deal with “physical risks”. ◇Diversification of production risk through global location strategy; ◇Implementation of awareness surveys for offices operating in countries and regions with high risk of climate change; ◇Innovation in the product line ◇Visualization of supply chains and enhancement of their flexibility; ◇Continuation of BCP trainings at domestic and overseas offices.
5. Risks for foreign investors
(1) Japan’s unit share system imposes restrictions in holdings of our common stock that do not constitute whole units
Our Articles of Incorporation provide that 100 shares of our stock constitute one "unit". The Companies Act of Japan imposes significant restrictions and limitations on holdings of shares that constitute less than a whole unit. Holders of shares constituting less than a unit do not have the right to vote. A shareholder who owns shares representing less than one unit will not be able to exercise any rights relating to voting rights, such as the right to participate in a demand for the resignation of a director, the right to participate in a demand for the convocation of a general meeting of shareholders and the right to join with other shareholders to propose an agenda item to be addressed at a general meeting of shareholders. Under the unit share system, holders of shares constituting less than a unit have the right to require us to purchase their shares. However, holders of the American Depositary Shares ("ADSs") that represent other than multiples of whole units cannot withdraw the underlying shares representing less than one unit and, therefore, they will be unable to exercise the right to require us to purchase the underlying shares. As a result, holders of ADSs representing shares in lots of less than one unit may not have access to the Japanese markets to sell their shares through the withdrawal mechanism.
(2) Rights of shareholders under Japanese law may be more limited than under the laws of other jurisdictions
Our Articles of Incorporation, Regulations of the Board of Directors, Share Trading Regulations and the other related regulations, as well as the Companies Act govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors’ and officers’ fiduciary duties and shareholders’ rights may be different from those that would apply if we were a non-Japanese company. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of other countries or jurisdictions within the United States. Shareholders may have more difficulty in asserting their rights as a shareholder than they would as a shareholder of a corporation organized in another jurisdiction. In addition, Japanese courts may not be willing to enforce liabilities against us in actions brought in Japan that are based upon the securities laws of the United States or any U.S. state.
(3) A holder of our ADSs will have fewer rights than a shareholder has and will need to act through the depositary to exercise those rights
The rights of the shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records and exercising appraisal rights are available only to holders of record. Because the depositary, through its custodian agent, is the record holder of the shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying ADSs as instructed by the ADS holder and will pay to ADS holders the dividends and distributions collected from us. However, as an ADS holder, shareholders will not be able to bring a derivative action, examine our accounting books and records or exercise appraisal rights in their capacity as ADS holder.
(4) Because of daily price range limitations under Japanese stock exchange rules, shareholders may not be able to sell their shares of our common stock at a particular price on any particular trading day, or at all
Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation limits for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his or her shares at such price on a particular trading day, or at all.
(5) Foreign exchange fluctuations may affect the dollar value of our ADSs and dividends payable to holders of our ADSs
Market prices for our ADSs may fall if the value of the yen declines against the U.S. dollar. In addition, the U.S. dollar amount of cash dividends and other cash payments made to holders of our ADSs would be reduced if the value of the yen declines against the U.S. dollar.
(6) It may not be possible for investors to effect service of process within the United States upon us or our members of the Board of Directors or members of the Audit and Supervisory Board or to enforce against us or these persons judgments obtained in United States courts predicated upon the civil liability provisions of the federal securities laws of the United States
We are a limited liability, joint-stock corporation incorporated under the laws of Japan. Most of our members of the Board of Directors or members of the Audit and Supervisory Board reside in Japan. A substantial portion of our assets and all or substantially all of the assets of these persons are located in Japan and elsewhere outside the United States. It may not be possible, therefore, for investors to effect service of process within the United States upon us or these persons or to enforce against us or these persons judgment obtained in United States courts predicated upon the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Japan, in original actions for enforcement of judgments of United States courts, of liabilities predicated solely upon the federal securities laws of the United States.